Revived focus on regulation after JPMorgan loss

Federal regulators and lawmakers are renewing the focus on financial regulation in the wake of a multibillion-dollar trading loss at JPMorgan Chase & Co.

News of the surprise loss at JPMorgan, the biggest U.S. bank by assets, has revived calls by Obama administration officials and Democratic lawmakers for tougher oversight of Wall Street banks. But Republicans insist that the 2010 financial overhaul law won’t prevent another crisis and will drive business overseas. Regulators are still drafting rules for much of the law, and they have been lobbied by big banks to water down key areas.

Most Republican lawmakers voted against the overhaul law, which came in response to the 2008 financial crisis.

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The Senate Banking Committee is holding a hearing Tuesday at which two key regulators will be asked about the trading loss at JPMorgan, the only major U.S. bank to stay profitable during the crisis.

Mary Schapiro, chairman of the Securities and Exchange Commission, has said that her agency, like all regulators, is “focused” on the JPMorgan situation. The SEC is examining the bank’s disclosures to shareholders about the trading loss.

The loss was disclosed May 10 by JPMorgan CEO Jamie Dimon in a hastily convened conference call with investors and journalists. Dimon in April had dismissed concerns about the bank’s trading as a “tempest in a teapot” — a characterization he recently acknowledged he had been “dead wrong” to make.

Gary Gensler, who heads the Commodity Futures Trading Commission, said Monday that agency has begun an investigation into JPMorgan’s ill-timed bet on complex financial instruments that led to the trading loss. Gensler said the inquiry is “related to credit derivatives products as traded by the chief investment office of JPMorgan Chase.” He declined to give any details.

Ina Drew, who was the bank’s chief investment officer and oversaw the trading group responsible for the loss, left JPMorgan last week.

Under the financial overhaul, the CFTC gained powers to monitor trading in indexes of derivatives. JPMorgan invested heavily in an index of insurance-like products that protect against default by bond issuers. Hedge funds were betting that the index would lose value, forcing JPMorgan to sell investments at a loss.

JPMorgan CEO Jamie Dimon has said the loss came from trading in credit derivatives that was designed to hedge against financial risk, not to make a profit for the bank.

The Banking Committee chairman, Sen. Tim Johnson, D-S.D., has said he is inviting Dimon to testify about the loss at a related hearing in the near future.

Dimon last week apologized to the bank’s shareholders. He said Monday that JPMorgan is suspending plans to buy back its own stock. The bank will continue to pay a dividend despite the trading loss, which Dimon called “an embarrassment” and “a black mark.”

The trading loss didn’t cause anything close to the panic that followed the September 2008 failure of the Lehman Brothers investment bank. But it shook the confidence of the financial industry. JPMorgan’s stock price has dropped 20 percent since the disclosure, lopping off $30 billion of market value.

It isn’t known whether the JPMorgan episode ultimately will result in stricter regulation.

It has recharged a debate about how to ensure that banks are strong and competitive without allowing them to become so big and complex that they threaten the financial system when they falter. Does the massive trading misfire at JPMorgan — widely seen as one of the safest banks — show that Wall Street banks have become “too big to fail” as well as “too big to manage?”

The loss also put a fresh spotlight on a part of the overhaul law known as the Volcker rule, which is designed to prevent banks from placing bets for their own profit. This is known as proprietary trading. The idea is to protect depositors’ money, which is insured by the government. If a bank’s losses were to wipe out those deposits, taxpayer money would have to be tapped.

Regulators are finalizing the Volcker rule. Dimon has been among its most vocal critics. The big Wall Street banks won an exemption in the rule: It would let them make such trades to hedge not only the risks of individual investments but also the risks of a broader investment portfolio.